AT&T (T -0.43%) posted its fourth-quarter earnings report on Jan. 25. The telecom giant's revenue from continuing operations rose 1% year over year to $31.3 billion, but missed analysts' expectations by $70 million. However, its adjusted earnings per share (EPS) from continuing operations grew 9% to $0.61 and cleared the consensus forecast by four cents. AT&T's growth rates look stable, but should investors still buy the stock at its six-month high? Let's review its growth rates and valuations to decide.
The slimmed-down AT&T is growing again
Over the past two and a half years, AT&T streamlined its business by spinning off DirecTV, divesting WarnerMedia through a merger with Discovery to create Warner Bros. Discovery (WBD 0.24%), and selling its smaller media subsidiaries, non-core assets, and real estate. Those divestments finally ended AT&T's messy, debt-driven attempt to build a pay TV and streaming media empire, and enabled it to finally focus on upgrading its core wireless and wireline networks again. Those efforts paid off as its core telecom businesses generated stable growth again.
Image source: AT&T.
This slimmed-down AT&T now generates most of its revenue from three business segments: Mobility (69% of its Q4 revenue), Business Wireline (18%), and Consumer Wireline (10%). As this table illustrates, the stable growth of its Mobility and Consumer Wireline revenues consistently offset the ongoing declines of its Business Wireline segment -- which faces tough macro and competitive headwinds -- over the past year.
|
Metric |
Q1 2022 |
Q2 2022 |
Q3 2022 |
Q4 2022 |
|---|---|---|---|---|
|
Mobility revenue growth (YOY) |
5.5% |
5.2% |
6% |
1.7% |
|
Business Wireline revenue growth (YOY) |
(6.7%) |
(7.6%) |
(4.5%) |
(4.5%) |
|
Consumer Wireline revenue growth (YOY) |
2% |
1.1% |
1.4% |
2.2% |
|
Total revenue growth (YOY) |
2.5% |
2.2% |
3.1% |
0.8% |
Data source: AT&T. YOY = Year over year.
AT&T's wireless business, the core growth engine of its Mobility segment, gained 2.9 million postpaid phone subscribers in 2022. Its larger rival Verizon (VZ 0.98%) only added 201,000 postpaid phone subscribers. AT&T is also retaining more of those wireless subscribers. The churn rate for its postpaid phone subscribers fell by a basis point year over year to 0.84% in Q4, while Verizon's churn rate rose eight basis points year over year to 0.89% in Q4.
During the fourth-quarter conference call, AT&T's CFO Pascal Desroches attributed that superior growth to its "targeted pricing actions, customers trading up to higher price unlimited plans, and improved roaming trends."
AT&T's total wireless service revenue rose 8% in 2022, and it predicts that figure will climb by at least 4% in 2023. It also expects its total broadband revenue -- which rose 6% in 2022 as it expanded its consumer-oriented Fiber networks -- to grow more than 5% in 2023. Analysts expect its total revenue to rise 2% for the full year.
Stable margins and cash flows
AT&T's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin declined by 310 basis points sequentially to 32.6% in Q4, but that still represented a 210-basis-point improvement from Q4 2021 (on a stand-alone basis). All three of AT&T's core businesses expanded their adjusted EBITDA margins year over year as it downsized its weaker divisions and focused most of its spending on 5G and fiber upgrades.
For 2023, it expects its capex to stay roughly flat year over year at $24 billion as its adjusted EBITDA increases by at least 3%. Analysts also expect its adjusted EBITDA to rise 3% to $42.8 billion for the full year.
AT&T expects its adjusted EPS to decline 5% to 9% in 2023 as it recognizes a $0.25 effect from higher non-cash pension costs and a higher tax rate. Excluding that effect, its adjusted EPS would likely rise 1% to 5%. By comparison, Verizon expects its adjusted EBITDA to stay roughly flat in 2023, and for its adjusted EPS to decline 6% to 12% as it continues to rely on margin-squeezing promotions and handset subsidies to attract new wireless customers.
AT&T also expects its annual free cash flow (FCF) to rise by at least $2 billion to over $16 billion in 2023. This should give it plenty of room to support its dividends (which consumed $9.9 billion of its FCF in 2022) and future buybacks.
Last but not least, AT&T reiterated its goal of reducing its net debt to adjusted EBITDA ratio to 2.5 this year. That's still a lot of leverage, but it would be significantly lower than its peak ratio of 3.1 in the first quarter of 2021.
AT&T is still a great safe haven investment
At $20 per share, AT&T trades at just 8 times the midpoint of its adjusted EPS estimate for 2023. It also pays a forward yield of 5.6%. AT&T certainly isn't an exciting stock, but I believe its low valuation, high yield, and stable growth rates should continue to make it a great safe haven play as the bear market drags on.
